The High Cost of Sending Money Abroad
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Despite recent technological advances, the costs for migrants to send money across borders to their families remain extremely high. On average, the charge for sending $200, the benchmark used by authorities to evaluate cost, is 7%. This includes fees from both sender and recipient intermediaries and the exchange rate margin of the amount sent. These high costs pose a significant burden on migrants and their families, limiting the full potential of remittances as a tool for economic support in some of the poorest countries in the world.
Keep in mind that some banks and money transfer companies impose a higher markup when converting local currency for international transfers. This markup is typically a percentage of the transfer amount, which can significantly impact the cost if you’re sending a large sum of money.
Breaking Down the High Costs of Remittances
The implementation of ‘know your client’ rules, anti-money laundering efforts, and other regulations have made it increasingly difficult to maintain an efficient payment system. Many banks have retired from the remittance business due to these complexities, leaving the market to a few large operators who profit from high fees. Annual cross-border remittances amount to half a trillion dollars, with three-quarters of this flow directed to low- and middle-income countries. These remittances promote economic activity and support incomes in these regions.
Yet, despite technological advances like domestic payment systems (e.g., Zelle, which offers zero marginal cost for person-to-person transfers), international remittances remain expensive. The high fees are not just a direct burden on migrant senders and their families but also impact poor countries as a whole. Remittances play a crucial role in enhancing growth by providing alternative means for financing investment where transaction costs are high. Policies that reduce remittance costs can boost capital formation and productivity in receiving countries, ultimately benefiting their economies.
What are the charges for remittance?
Remittance charges typically include a combination of service fees and exchange rate margins. The service fee is a fixed or percentage-based charge levied by the sending and receiving intermediaries, such as banks or money transfer services. On average, sending $200 costs about 7%, which includes these service fees and the exchange rate margin. The exchange rate margin is the difference between the interbank exchange rate and the rate offered to the customer, allowing providers to profit from currency conversion. Additional costs may arise from compliance with regulations like anti-money laundering and ‘know your client’ rules, making remittances more expensive and less efficient.
How to reduce remittance cost?
Enhancing competition in the remittance industry, especially in high-cost corridors, can significantly reduce transfer costs. Encouraging more players to enter the market increases competition, driving down prices. Regulatory reforms that simplify compliance without compromising security can also lower costs.
Promoting the use of digital and mobile money transfer services, which often have lower fees than traditional methods, is another effective strategy. Encouraging transparency in pricing and exchange rates helps consumers make informed decisions, further driving competition.
Finally, fostering partnerships between financial institutions and fintech companies can create more efficient and cost-effective transfer channels. These measures not only reduce costs but also increase legitimate funding flows and promote the use of formal, regulated transfer channels, maximizing the impact of remittances and leading to deeper financial inclusion.
What is the average remittance fee?
Worldwide, sending remittances typically costs around 7% of the amount being sent.
